"We could be getting close to the bottom of the NPAs (non-performing assets) cycle, valuations were not that expensive, hence funds could have preferred buying into the sector," Quantum Mutual Fund Associate Fund Manager Equity Nilesh Shetty said.

Mutual funds' allocation for bank stocks hit a record high of Rs 1.16 lakh crore in end-January, primarily on account of cheaper valuations. Photo: Pixabay

Mutual funds' allocation for bank stocks hit a record high of Rs 1.16 lakh crore in end-January, primarily on account of cheaper valuations.

In comparison, fund managers had allocated Rs 78,644 crore for bank shares in the year-ago period.

"We could be getting close to the bottom of the NPAs (non-performing assets) cycle, valuations were not that expensive, hence funds could have preferred buying into the sector," Quantum Mutual Fund Associate Fund Manager Equity Nilesh Shetty said.

In percentage terms, exposure to banking stocks was at 20.91 per cent of equity assets under management last month as against 20.84 per cent in December-end.

Overall, deployment of equity funds in bank stocks stood at Rs 1,16,002 crore at the end of January, compared with Rs 1,06,203 crore in the preceding month, as per the latest data available from the Securities and Exchange Board of India (Sebi).

Fund managers have been increasing their allocation to banking stocks for quite some time due to an ongoing clean-up exercise of the Indian banking system initiated by the RBI by keeping a tab on the NPAs.

Banking continues to be the most preferred sector with fund managers as they cannot afford to take a bearish call on the banking stocks, given the high weightage attached to the index.

After banks, IT was the second-most preferred sector with fund mangers.